Despite a number of economic data releases, global equity markets have effectively gone nowhere so far this week as everyone is waiting for the conclusion of this evening’s Fed monetary policy.
This is because Fed policymakers may give an indication of whether or not it is time to start discussing the need to scale back (and then reverse) their bond buying program (QE) – and with the Fed due to update their ‘dot plot’ (which shows each policymaker’s interest rate forecast for each of the next three years), there is growing market speculation that the Fed will increase US interest rates as early as next year.
While a shift in the dot plot is easily conceivable, as seven of the 18 policymakers are already forecasting an increase in 2022, it should be emphasised that the dot plot is not a commitment, just a forecast.
And while recent US economic data clearly shows that the US economy is recovering, we don’t believe it has been strong enough to justify higher interest rates anytime soon – especially as the high inflation readings are transitory (please see here) and the employment market is still a long way from where it was before the coronavirus outbreak.
Consequently, while we fully expect tonight’s announcement to remain suitably dovish, we will be looking for any slight changes in the tone.
Elsewhere, this morning’s UK CPI inflation reading came in above the BoE’s 2% target at 2.1% thanks to the economic reopening as fuel; clothing & footwear; transport; and holidays (including hotels) all saw large increases.
Other economic data from the UK this week showed that the easing of lockdown restrictions was helping to reduce unemployment: the unemployment rate falling to 4.7% in April from 4.8% in March as employment rose by 113,000 in the three months to April – and although wage growth increased to 5.6%, this is being distorted as furloughed staff return to work.
Investment Management Team